Sales of existing homes fall by largest amount on record

Wednesday, October 24, 2007

WASHINGTON (AP) -- Sales of existing homes plunged by a record amount in September while median home prices dropped by the largest amount in nearly a year, reflecting deepening problems in the troubled housing market.

Analysts said the current downturn is already more severe than the housing slump of the 1990s and they predicted before it is resolved it will rival the 1980-82 housing slump when the industry was battered by double-digit mortgage rates and a steep economic downturn.

The National Association of Realtors reported Wednesday that sales of existing homes fell 8 percent in September, the largest decline to show up in records dating to 1999. The seasonally adjusted annual sales rate of 5.04 million existing homes was also the slowest pace on record.

The median price -- the point at which half the homes sold for more and half for less -- fell to $211,700 in September, down by 4.2 percent from the sales price a year ago. It was the biggest price drop since last October and marked the 13th time out of the past 14 months that the year-over-year sales price has decreased.

Problems in housing worsened in September following a severe credit crunch that hit in August as banks and other lenders tightened standards in the face of soaring mortgage defaults. The market all but dried up for subprime borrowers, those with weak credit histories, and people seeking so-called jumbo loans over $417,000.

Many economists said the problems in housing could well last for another year, given record-high levels of unsold new and existing homes.

"The housing market is unraveling," said Mark Zandi, chief economist at Moody's "We are in a steep downturn and the prospects are that it is going to get worse before it gets better."

The 8 percent decline in sales was bigger than the 4.5 percent drop that had been expected. It marked the seventh straight monthly decline and left sales activity 19.1 percent below the pace of a year ago. Last week, the government reported that construction of new homes slid to the slowest pace in 101/2 years in September as builders continue to cut back in the face of weak demand.

The housing slump followed five straight years of record sales, a boom that was fueled by the lowest mortgage rates in four decades. The housing boom lured many investors to purchase second homes in hopes of flipping them for quick profits.

That all began to turn down late last year as mortgage rates began to rise and buyers began to balk at the huge price gains that had been occurring in the hottest sales areas such as California, Florida and parts of the Northeast.

Analysts blamed the bigger-than-expected sales slump in September on the turmoil that hit credit and mortgage markets in August as worries increased over rising mortgage foreclosures.

"Mortgage problems were peaking back in August when many of the September closings were being negotiated and that slowed sales notably in higher priced areas that rely more on jumbo loans," said Lawrence Yun, senior economist for the Realtors.

By region of the country sales were down 10 percent in the Northeast, 9.9 percent in the West, 7 percent in the Midwest and 6 percent in the South.

The slowdown in sales meant that the inventory of unsold homes rose to 4.4 million units in September. At the September sales pace, it would 10.5 months to eliminate the overhang of unsold homes, a record length of time.

Yun forecast that prices will decline by 1.5 percent this year, compared to 2006. That would be the first annual price decline in the four decades that the Realtors have been tracking prices.

The troubles in housing have been a drag on overall economic growth, increasing worries that the housing slump and related credit market troubles could become so severe that they will push the country into a recession.

However, many private economists believe that the Federal Reserve, which cut a key interest rate for the first time in four years last month, will continue cutting rates to make sure that the weakening economy does not tumble into a full-blown recession. The Fed meets again next week.

"The housing crunch is accelerating. The Fed can't stand by and watch," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.

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